SITREP | Russian Military Expenditure Overtime

For a decade Russia's geopolitical ambitions have been reflected in increased defense spending. However, the failure to modernize the economy and make it less dependent on hydrocarbons and more innovative led to weak growth after 2009, which means that rising defense spending has become more costly to the economy. With the addition of the confidence crisis resulting from the Ukrainian Campaign in 2014, the resulting capital flight and the expected contraction of the economy in 2015, the preconditions for further growth of military and other public spending have changed dramatically.

In 2015, Russia increased its defense spending in rubles by 7.5 percent. However, the falling oil prices and the ruble’s collapse against the dollar have squeezed Moscow out of the top three slots on the SIPRI rating of military spenders: the Stockholm institute calculates defense spending in dollars. However, looking at actual dollar spending in the report, the picture is starkly different.

Percentage-wise, Russia is one of the world leaders in terms of the share of GDP spent on defense. For instance, the United States’ defense spending makes up 3.5 percent of its GDP, with China’s reaching some 2.1 percent, whereas Russia’s amounts to 4.5 percent of its GDP (Q1 2016). The Russian figure is the world’s largest after Saudi Arabia and the UAE, which spend 10.4 and 5.1 percent of their GDP respectively on arms. [1]

From the study of the federal budget share of defense it is evident that defense still has high priority in terms of a rising share of GDP. Yet defense spending has been reduced in light of the deteriorating economic situation in 2015. Thus there is still a trade-off between defense and other spending in the budget, even though it is evident that other items are being reduced significantly, such as health services, support to the economy and environmental protection. Russian Minister of Finance Anton Siluanov has argued since the fall of 2014 that defense spending must be reduced since at the moment Russia cannot afford this spending and that a new, more realistic defense program had to be developed. Even though the cut in the defense budget has been less than foreseen by the Ministry of Finance, the budget item has been cut by almost 5 percent nominally compared to the November budget. How this will affect the building up of military capability in terms of the armament program and personnel needs to be the subject of a separate study, but we already know that the funding of the new armament program up to 2025 was reduced considerably during the fall of 2014.

The amendments to the federal budget law 2015 imply a higher budget deficit than originally planned and that the government will use the Reserve Fund to finance it. This means that about USD 50 billion will be drawn from the Reserve Fund, which corresponds to about 60 percent of the whole fund. This reduces Russia's fiscal maneuvering room for future years if the economy does not recover or Western financial markets do not open up for Russian state banks.